Out of Russia's ashes--treasure

Russia now has one of the world's highest number of billionaires. How did so many rise out of such a shell-shocked economy?

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Russia's economy may not have much to boast of these days, but it has produced one of the world's largest crops of billionaires. FORBES GLOBAL counts 17 Russian billionaires this year, up from zero in 2000. Only the U.S., Germany and Japan have more. Considering the modest size of the Russian economy these days, Russia may well have the highest billionaire-to-GDP ratio in the world.

How can this be, in a nation that until recently has been on the decline?

Russia's flawed transition from communism to a market economy in the 1990s was one of the most mishandled reforms in history. The country's GDP declined by 41%, vast swaths of the economy were simply wiped out and the majority of the population was plunged into poverty. In the midst of this chaos a small group of insiders (nick-named the "oligarchs") figured out how to buy the bulk of the country's natural resources from the state at nominal prices.

The 1990s asset grab did not make the oligarchs instant billionaires-only potential ones. Potential wealth has been transformed into real wealth only in the last several years, when many of the oligarchs forswore their old pirate-capitalist ways and began paying attention to building shareholder value.

All but three of this year's billionaires derive at least part of their wealth from companies that trade on Western exchanges. Now that many big Russian companies have started publishing Western-style accounts, paying dividends and respecting minority holders, equity markets have begun to value the country's natural-resource wealth at something close to global benchmarks.

Leading the way in this transition is oil giant
Yukos
, the fiefdom of
Mikhail Khodorkovsky
, Russia's wealthiest man. Just a few years ago Khodorkovsky's outfit used to have one of the worst reputations for corporate piracy. But since 1999 Yukos has made an about-face, switching to U.S. Gaap accounts, issuing an ADR, bringing Westerners into top management and onto its board of directors and paying out hefty dividends. Investors have enthusiastically bought up Yukos' shares, pushing its market cap to more than $20 billion.

Russia has become a safer place to invest. Witness BP's recent deal to merge its Russian oil assets with TNK, a big private oil company jointly owned by billionaires Mikhail Fridman and Viktor Vekselberg. The
BP
deal gives the combined company an enterprise value of around $18 billion. With BP paying $6.75 billion in cash and BP stock to Fridman, Vekselberg and their partners, the deal represents the largest single investment in Russia to date.

While not exactly civilized yet, the Russian marketplace is benefiting from the stability brought by the administration of President Vladimir Putin. Gone is the gangster free-for-all of the Yeltsin era. Putin has chosen a more measured pace of market liberalization, as well as more predictable rules.

These days the oligarchs feel so secure that many have begun to divulge precisely how much of their companies they own. Forbes first met Mikhail Khodorkovsky in 1994, when he was head of a burgeoning banking and commodities-trading empire. "I personally do not own a single share in my company," he told us demurely. "I just have my salary and my car." Now Khodorkovsky says that he owns 59% of his
Group Menatep
holding company.

It's the same story with
Lukoil
, Russia's largest oil company. For years Lukoil officials denied our estimates that company boss Vagit Alekperov owned 10% of Lukoil. Alekperov's stake was less than 1%, they claimed. Last year, in a prospectus for a Lukoil share offering in London, Alekperov was listed as owning 10% of Lukoil's shares, after all.

If you want a quick explanation of why Russia has produced so many billionaires so quickly, you need look no further than the Russian stock market. The RTS index is up 526% in dollar terms since the beginning of 1999. Sure, it helps that oil prices are the highest they have been in decades. But a more civilized attitude to minority investors is just as much a factor.

This year, for the first time, the wealth of Russia's billionaires is not based solely on natural resources. A significant portion of Mikhail Fridman's net worth derives from his stake in Vimpelcom, Russia's No. 2 cell phone company, while most of the net worth of newcomer Vladimir Yevtushenkov is derived from his stake in MTS, the No. 1 cell operator. This is a sign that, with the Russian economy in its fifth year of growth, the country is finally creating a serious consumer market. Some of the oligarchs' vast wealth, it seems, is starting to trickle down.